Bank Danamon Indonesia (BDMN IJ) is similarly an ongoing transaction and arguably the premium is higher than 14.9%, which is based on the last close.
Directly below is a summary of ongoing M&A situations, followed by a recap of news associated with each event situation.
Source: Company announcements, our workings
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RPC Group PLC (RPC LN) (“RPC” or the “Company”) is a leading global plastic products design and engineering company based in Rushden, Northamptonshire, less than two hours north of London, and has over 188 operations in 33 countries with FYE March ’18 sales of £3.75 billion. RPC’s products are used in food and non-food packaging, including in beverage, health care and personal care.
After media speculation, RPC confirmed on September 10, 2018 that preliminary discussions were taking place with each of Apollo Global Management (APO US) and Bain Capital which may result in an offer for the Company. After five “put up or shut up” (“PUSU”) extensions, the Company issued a Rule 2.7 announcement of a recommended final cash offer for RPC Group PLC by a unit of Apollo on January 23, 2019 for 782p cash per share intended to be implemented by way of a scheme of arrangement.
The price of 782p was a disappointment to some, with two institutional shareholders, Aviva, with 1.93% and Royal London Asset Management, with 1.44%, expressing disappointment with the offer valuation.
On January 31, 2019 Berry Global Group, Inc. a former Apollo Global Management portfolio company, announced it was considering a possible cash offer for RPC and has requested due diligence information from RPC for this purpose. RPC responded with a release confirming it will engage with Berry in order to advance discussions in the interests of delivering best value to shareholders.
The shares closed Friday, February 1st at 793p, 1.4% above the agreed deal price. In this piece we’ll get up to speed with the relevant facts and explore how things might play out from here.
In this version of the GER weekly research wrap, we dig into the debt tender for Softbank Group (9984 JP) and assess the merger between TPG Telecom Ltd (TPM AU) and VHA. On the IPO front, we initiate on CStone Pharma (CSTONE HK) while we update on Ebang (EBANG HK) . Finally, we dig into the beat at Facebook Inc A (FB US) and assess whether there are further legs for the investment case. We also provide a list of upcoming catalysts for upcoming event-driven ideas.
More details can be found below.
Best of luck for the new week – Rickin, Venkat and Arun
With Brookfield’s binding proposal providing a floor, the shares are viewed as attractive as BGH-AustralianSuper, a rival bidder could start a bidding war. However, we maintain our view that in the event AustralianSuper decides to stick with the consortium, BGH-AustralianSuper’s improved offer is unlikely to provide material upside.
Campbell Gunn tackled Toppan, whose market capitalisation has grown by only 2% per annum or just ¥34b since December 2013. From the recent peak in June 2017, Toppan shares have underperformed the market by 27% and, for the last year, have been at their most extreme value relative to TOPIX over the previous thirty years.
Toppan’s investment portfolio (341 companies with an aggregate market value as of the last quarter of ¥498bn) has grown at a 39.1% compound annual growth rate (CAGR) over the last five years, outperforming Toppan’s core operations (6.4% CAGR) and the overall stock market (7.5% CAGR). The economic reality for Toppan is that the company’s investment business has far surpassed the core business in terms of ‘margins’ and contribution to Net Assets.
The company has become more (relatively speaking) proactive in managing equity risk, and recently sold 10.5m shares in Recruit Holdings (6098 JP)(its largest investment holding) for approximately ¥31.5b, reducing Toppan’s holding in Japan’s leading listing employment services business from 6.57% to 6.05%. With this sale, Toppan’s liquid assets will now exceed US$3b or 58% of the current market capitalisation.
Toppan’s business and investment portfolio should be radically pruned or eliminated. Such a transformation probably requires a change of management, the presence of an activist investor, or both. The latter is the more likely outcome.
HHIC mainly comprises its own shipbuilding/marine plant business (75% of GAV) and 80.54% in Samho Heavy stake (15% of GAV), both unlisted. Samho Heavy owns a 42.40% stake in Hyundai Mipo Dockyard (010620 KS). HHIC announced it will split-off (no new shares issues) with the surviving company an intermediate holdco (same ticker, 009540) and new opco (unlisted) holding Samho Heavy and the in-house shipbuilding/marine plant business.
Next, DSME undertakes its own rights offer (39.9% of DSME’s shares), via a third party allocation to intermediate Holdco with a target value of ₩1.5tn, in an all cash deal. The intermediate holdco will ultimately hold a 68.3% stake in DSME. DSME will remain a listed company therefore no tender offer to the remaining shareholders is expected, according to Sanghyun Park. Details are not finalised and further information is expected on the 8 March.
Netmarble Games (251270 KS)officially announced it is interested in buying Nexon/NXC Corp. At this point, it appears that a higher probability scenario is for Tencent Holdings (700 HK) to form a consortium with either Netmarble Games or Kakao Corp (035720 KS) in bidding for Nexon/NXC Corp. Douglas’ justification for this are:
To avoid the cultural backlash from Korean gamers.
Tencent is a minority investor of both Netmarble Games and Kakao. Tencent’s 17.7% stake in Netmarble Games is worth ₩1.6tn. Tencent’s 6.7% stake in Kakao which is worth ₩0.6tn.
Netmarble Games is more focused on games and has a stronger balance sheet than Kakao Corp, which has also shown interest in acquiring NXC Corp/Nexon.
Relationship problems started in 2013 when Itochu Corp (8001 JP) was pushed out of the leadership spot in Descente without any warning or even any face-saving honorary role for its outgoing leader. This was hostile and the frictions were laid bare for anyone who cared to see them. They got worse when Itochu bought shares last summer without telling Descente. They got even worse when Descente signed a deal which would effectively end in a merger with Wacoal without telling Itochu. So it should have been less of a surprise than it appeared when Itochu announced this past Thursday it would launch a Partial Tender Offer for 9.56% of the shares outstanding of Descente.
Itochu’s Partial Tender is interesting, and there is a trade here if enough people are sceptical of Descente’s ability to play hardball. It is, however, not particularly cheap, and the shares were below ¥2,000/share last Wednesday for a reason.
Because Itochu is putting itself in a place to not be able to win (i.e. not control the board post-tender, also knowing that Descente could dilute them at will), this is an invitation by Itochu to minority shareholders to make their opinions known, for the media and commentators to do so too, and for someone else to come in over the top.
Travis Lundy thinks this goes to close to ¥2800 – and did close at ¥2,771 on Friday – because of expectations that Descente will find a white knight to pay more or that the family could launch an MBO. Anybody who wants Descente doesn’t want it for its Japan business. So paying a higher price than someone who wants to expand aggressively in China to allow entrenched management to not expand aggressively in China requires deeper pockets or a lot more patience.
Healthscope has announced it has entered into an Implementation Deed with Brookfield, under which Brookfield seeks to acquire 100% of Healthscope by way of a scheme at A$2.50/share, and a simultaneous Off-market takeover Offer at $2.40/share, both inclusive of an interim dividend of $.035/share. The considerations under these proposals compare to the earlier indicative considerations of $2.585/share and $2.455/share respectively under the unsolicited conditional proposals announced back in November.
HSO also announced that the BGH-led consortium, which holds a ~20% stake, said it could improve the terms of its previous offer of $2.36/share, provided it was given access to Healthscope’s data room.
The 3.3% and 2.2% step down in Consideration under the Scheme and Off-market Offer compared to the earlier proposals underscores the uneasy backdrop to this Offer on account of various operational issues faced by Healthscope. It also underlines the fact that even provided due diligence, there can be no guarantee the BGH-led consortium will bump its initial bid.
Shares are trading at a punchy $2.45/share, facing either the Scheme proposal or the possibility the BGH ups its offer, with or without due diligence. This is a mid-single-digits annualized return which assumes that either BGH will up, or will take the Scheme rather than see whether the Off-Market Takeover gets done. This is okay, but not great. I’d look to enter closer to the Off-market consideration level.
On 26 October Hitachi Ltd (6501 JP)and Faurecia (EO FP)announced that Faurecia would take over Hitachi car audio and infotainment equipment subsidiary in Clarion a tender offer to be launched 3+ months hence. Clarion has now announced a forecast revision for the fiscal year to 31 March 2019 which involves a shortfall in revenue of 9.1%, a 16.7% drop in forecast Operating Profit, and a drop in Net Profit from ¥1.7bn to a loss of ¥500mn (a ¥2.2bn swing); fortunately Faurecia also announced it will go through with the deal with no changes (other than to extend the Tender Offer to 21 business days).
This deal is quite straightforward. The deal is on schedule and coming through as planned.
Travis expects this deal will end up with Faurecia owning over 90% and there will be a Demand For Shares as allowed to Special Controlling Shareholders (under Article 179, Paragraph 1 of the Companies Act) allowing them to force out minorities, potentially by the 3rd week of March 2019.
At the current close of ¥2,496, it is offering <2% annualized return for slightly more than one-month of cash usage, and negligible risk this deal doesn’t go through. Tight, but to be expected.
Thirty minutes after Eclipx guided down its FY19 NPATA figure, Mcmillan Shakespeare (MMS AU)announced that the first court meeting to be held on the 1st February – which would consider the Scheme documents that are sent to ECX shareholders – will be rescheduled. No new date was announced.
Taken purely on the guidance downgrade and the MAC’s described in the SIA, on balance, this deal still looks good to go. I don’t see a MAC being triggered here.
But this new development could/should also be viewed in conjunction with the large step down in NPATA guidance for FY18 (announced on the 6 August 2018, and resulted in the large decline as seen in the chart below), where FY18 NPATA was guidance was reduced to A$77-$80mn (13-17% growth ) versus prior guidance of 27-30% growth. Perhaps MMS want ECX to come out and say their forecast for annual NPATA is down 10%.
Still, at a 15% gross spread to terms and trading ~5% above its undisturbed price, prior to Sg Fleet (SGF AU)‘s August proposal – while ECX’s peer group is down 17% on average since SGF’s tilt – the negative news surrounding the NPATA guidance and the MACs appears fully priced in.
The deal is done. Shareholders approved the deal. Given where book value and market prices were on the day before the revised plan was announced on 7 December, Travis expects a spirited appraisal rights process.
For those who are now looking at this as an arb situation, the return is quite decent if you buy on the bid and can get multiples of leverage and keep them after the shares have been delisted, while waiting for payment. If you can get multiples of leverage only while the shares are listed, it is still pretty OK. If you are an arb with no leverage, this is still OK for a Japanese deal.
SCSK announced a Tender Offer to buy out minorities in Veriserve, in which it holds 55.59% of voting rights. The Tender Offer is at ¥6,700/share which is a 43.6% premium to the last traded price. The price does not seem egregiously unfair, but for investors who own it who think it has another double in it this year they might get upset. And the lack of good process here deserves attention.
The lack of imagining a competing bid is not good governance. The lack of looking for one is not either. The lack of true fairness opinion is also not good governance.
Still, it is at a 14+year high. It is a small cap. Not that many people will care. It is not cheap on a PER basis and not really inexpensive on an EV/EBITDA basis.
There IS a chance, theoretically, that this does not go through. SCSK doesn’t have a super-majority, and if it does not get 11.1% of the shares outstanding, it will not be able to automatically squeeze out minorities. But Travis does not think it will be particularly difficult to get there.
Sumitomo Corp (8053 JP) consolidated subsidiary SCSK Corp (9719 JP) announced a Tender Offer to buy out minorities in JIEC at ¥2,750/share, in which it has 69.52% of voting rights. This deal is a worthwhile example of some of the weaknesses in the execution of the current Corporate Governance Code and the “fairness” of M&A in Japan.
The lack of a competing bid and true fairness opinion are not good governance. The fact that the bid is 1.4% above the bottom of the Target’s own Advisor’s fair value DCF valuation range while the top of the range is 61.3% higher is disappointing.
But what are you gonna do? SCSK has a super-majority. The stock is super-duper illiquid. The Offer is a 31% premium to the highest price ever paid for the stock. There is no minimum to the tender so it will be “successful” if no one tenders.
So you suck it up and buy and tender, or tender what you own. And then you write a public comment to the METI Fair M&A process.
Mastercard Inc Class A (MA US) has made a £233mn Offer (£0.33/share) to take over cross-border payments firm Earthport, trumpingVisa Inc Class A Shares (V US)‘s offer late December by 10%. The Offer is conditional on 75% of EPO’s shareholders accepting with 13.08% of shares outstanding in the bag. EPO’s shares increased to £0.282 following Visa’s offer, but currently trade at £0.37.50, ~14% above the latest offer, suggesting a higher bid is likely, or at least expected.
For EPO shareholders, who watched their shares erase 70% of their value over the last 2 years and trade around £0.05 earlier this month, this is a fantastic result. Mastercard’s bid also comes at a 65% premium to the placement at £0.20/share on 4 October 2017.
A (significantly) higher offer price is plausible. EPO can be seen as a disruptor to these card giants. Instantaneous bank-to-bank transfers and the increase in mobile payments are a threat to their traditional business models as they eliminate payment cards from the transaction loop. Both Visa and Mastercard have deep pockets and EPO would help both Visa and Mastercard expand their product offering.
There is no clear or discernible pricing methodology to exact where a bidding war will send the share price. But it could get (unsurprisingly) crazier from here. I think a £0.40/share offer is not unreasonable or out of the question, and is a level where shares often found support for a year and half back in 2014 and 2015.
CMA CGM SA (144898Z FP)has published its prospectus for what is evidently a heavily orchestrated Public Tender Offer for CEVA. Ceva’s Board has concluded that offer is fair & reasonable but does not recommend shareholders tender. CMA CGM added that “the recommendation to shareholders from the CEVA board not to tender shares in exchange for cash is done in perfect agreement with CMA CGM“.
CMA CGM currently holds 50.6% of CEVA, via a 33% direct stake with the remainder in derivatives. After a 10-trading day cooling off period, the offer will be open for acceptances between February 12 to March 12, unless extended. It is the intention of CMA CGM to maintain CEVA’s listing.
For the month of January, seventeen new deals were discussed on Smartkarma with an overall deal size of US$91bn. This number does not include rumours on Nexon Gt Co Ltd (041140 KS) and Capitaland Ltd (CAPL SP)‘s acquisition of Ascendas-Singbridge. The average transaction premium was 43%, or 26% if ignoring Earthport plc (EPO LN)‘s offer. This insight provides a summary of ongoing M&A situations and a recap of news associated with each event situation in January.
HOC initially targeted an IPO in 2018 with an expected market cap and an enterprise value of ~₩8tn and ₩10tn respectively, as discussed by Sanghyun in an earlier insight (Hyundai Oilbank IPO Update: Timeline & Valuation). The IPO was postponed after the regulator picked over the balance sheet; and probably just as well, as falling refining margins resulted in HOC’s operating profit declining 42% to ₩661bn last year. The sale to Aramco is expected to push the IPO back to later this year.
Prior to Aramco’s involvement, HHI was (and effectively is) a weakish stub with the 31% stake in HHIC accounting for just 32%/26% of NAV/GAV; the unlisted operations and the future earnings of those investments were more critical to understanding HHI’s valuation. This investment by Aramco quantifies the valuation for the majority (~95%) of HHI’s unlisted investments, reinforcing the already somewhat prevalent view that HHI’s discount to NAV was excessively wide.
But HHI/HHIC weren’t done yet. Just when the NAV was expected to narrow further – especially as additional newsflow filters in on the outcome of the board meetings, the expected timeline to completion, and the possibility of HOC’s IPO later this year – HHIC announced a split-off, a PIK and rights issue. Please refer to this development in the “Events” section above.
The U.S. Treasury (OFAC) has lifted sanctions imposed on En+ Group plc, UC Rusal plc, and JSC EuroSibEnergo. The key to lifting these sanctions was Oleg Deripaska reducing his direct and indirect shareholding stake in these companies and severing his control. All sanctions on Deripaska continue in force.
Rusal announced that En+ had entered into a securities exchange agreement with Glencore, pursuant to which Glencore shall transfer 8.75% of Rusal’s shares to En+ in consideration for En+ issuing new GDRs to Glencore representing approximately 10.55% of the enlarged share capital of En+.
The transfer will be done in two stages: 2% to be transferred following the removal of Rusal and EN+ from the SDN list; and 6.75% 12 months later. This two-stage process appears geared to circumvent a mandatory takeover by En+. Hong Kong employs a “creeper” speed limit, where shareholders (holding between 30-50%) can creep their shareholding upwards by 2% in a 12-month period (Rule 26.1 (c)).
As an aside, after sanctions were lifted, En+ announced seven new directors, including Christopher Bancroft Burnham, who served as Under Secretary-General for Management of the United Nations (alongside John Bolton, Trump’s current national security adviser). Burnham was also on Trump’s Presidential Transition Team
Rusal’s NAV discount has narrowed to 68.5% from 71% the previous Friday. This compares to the 45-50% discount range prior to the sanctions being imposed. This should narrow further.
I issued a month-end share class summary, a companion insight to Travis’ H/A Spread & Southbound Monitors and Ke Yan‘s HK Connect Discovery Weeklies. This share class monitor provides a snapshot of the premium/discounts for 215 share classifications (ADRs, Koran prefs, Dual-class, Thai foreign/local Thai) around the region.
The average premium/discount for each set over a one-year period is graphed below.
By Travis’ calcs, there was something on the order of ¥630-650bn of shares of several names to buy on the close this past Wednesday. There was also, therefore, something like ¥630-650bn of TOPIX and JPX Nikkei 400 (almost all TOPIX) to sell on the close of Wednesday.
Softbank Corp (9434 JP) was expected to see total buying of ¥340bn or so; and Takeda Pharmaceutical (4502 JP)buying of ¥260-280bn at the close. (Both names did trade a very large amount off-market.) A number of other names see TOPIX inclusions because of them listing on TSE1 in December or because of share count increasing because of merger (like LIFULL (2120 JP)) or because of offerings.
A VERY significant amount of both names were purchased in “guaranteed close” trades where indexers actually paid close-plus pricing until the very end of the day because of fears that the actual market might not close. This meant that on-market volume for Takeda and Softbank was a fraction of what might be expected. The risk was transferred but to get in the flow you had to trade off-market.
The Centuria Capital (CNI AU) resolution has passed. This resolution was not a vote to decide on tendering the shares held by CNI in Propertylink Group (PLG AU) into ESR’s offer; but to give CNI’s board the authorisation to tender (or not to tender) those PLG shares.
Minebea Co Ltd (6479 JP)announced that it had received all relevant anti-trust approvals but would not start the Tender Offer for U Shin Ltd (6985 JP) until the start of February (the original announcement had said the Tender would commence at the end of January).
The interesting path of the Mobius strip of connections that is the HCN continues: China Goldjoy (1282 HK)‘s chairman Yao Jianhui (& others) have pledged 12.14% of China Goldjoy to Huarong Investments (2277HK). Goldjoy is the Offeror for New Sports Group (299 HK).
CCASS
My ongoing series flags large moves (~10%) in CCASS holdings over the past week or so, moves which are often outside normal market transactions. These may be indicative of share pledges. Or potential takeovers. Or simply help understand volume swings.
Often these moves can easily be explained – the placement of new shares, rights issue, movements subsequent to a takeover, amongst others. For those mentioned below, I could not find an obvious reason for the CCASS move.
Netmarble Games (251270 KS) officially announced on January 31st that it is interested in buying Nexon/NXC Corp. We believe that there is a growing likelihood of a potential consortium which includes Tencent and Netmarble Games to acquire NXC Corp/Nexon. Three major reasons why Tencent may want to partner with Netmarble Games to acquire NXC Corp/Nexon include the following:
Avoid the cultural backlash from Korean gamers
Among all the companies that Tencent has invested in Korea, Netmarble Games has become the biggest in amount.
Netmarble Games is more focused on games and has a stronger balance sheet than Kakao Corp, which has also shown interest in acquiring NXC Corp/Nexon.
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Campbell Gunn tackled Toppan, whose market capitalisation has grown by only 2% per annum or just ¥34b since December 2013. From the recent peak in June 2017, Toppan shares have underperformed the market by 27% and, for the last year, have been at their most extreme value relative to TOPIX over the previous thirty years.
Toppan’s investment portfolio (341 companies with an aggregate market value as of the last quarter of ¥498bn) has grown at a 39.1% compound annual growth rate (CAGR) over the last five years, outperforming Toppan’s core operations (6.4% CAGR) and the overall stock market (7.5% CAGR). The economic reality for Toppan is that the company’s investment business has far surpassed the core business in terms of ‘margins’ and contribution to Net Assets.
The company has become more (relatively speaking) proactive in managing equity risk, and recently sold 10.5m shares in Recruit Holdings (6098 JP)(its largest investment holding) for approximately ¥31.5b, reducing Toppan’s holding in Japan’s leading listing employment services business from 6.57% to 6.05%. With this sale, Toppan’s liquid assets will now exceed US$3b or 58% of the current market capitalisation.
Toppan’s business and investment portfolio should be radically pruned or eliminated. Such a transformation probably requires a change of management, the presence of an activist investor, or both. The latter is the more likely outcome.
HHIC mainly comprises its own shipbuilding/marine plant business (75% of GAV) and 80.54% in Samho Heavy stake (15% of GAV), both unlisted. Samho Heavy owns a 42.40% stake in Hyundai Mipo Dockyard (010620 KS). HHIC announced it will split-off (no new shares issues) with the surviving company an intermediate holdco (same ticker, 009540) and new opco (unlisted) holding Samho Heavy and the in-house shipbuilding/marine plant business.
Next, DSME undertakes its own rights offer (39.9% of DSME’s shares), via a third party allocation to intermediate Holdco with a target value of ₩1.5tn, in an all cash deal. The intermediate holdco will ultimately hold a 68.3% stake in DSME. DSME will remain a listed company therefore no tender offer to the remaining shareholders is expected, according to Sanghyun Park. Details are not finalised and further information is expected on the 8 March.
Netmarble Games (251270 KS)officially announced it is interested in buying Nexon/NXC Corp. At this point, it appears that a higher probability scenario is for Tencent Holdings (700 HK) to form a consortium with either Netmarble Games or Kakao Corp (035720 KS) in bidding for Nexon/NXC Corp. Douglas’ justification for this are:
To avoid the cultural backlash from Korean gamers.
Tencent is a minority investor of both Netmarble Games and Kakao. Tencent’s 17.7% stake in Netmarble Games is worth ₩1.6tn. Tencent’s 6.7% stake in Kakao which is worth ₩0.6tn.
Netmarble Games is more focused on games and has a stronger balance sheet than Kakao Corp, which has also shown interest in acquiring NXC Corp/Nexon.
Relationship problems started in 2013 when Itochu Corp (8001 JP) was pushed out of the leadership spot in Descente without any warning or even any face-saving honorary role for its outgoing leader. This was hostile and the frictions were laid bare for anyone who cared to see them. They got worse when Itochu bought shares last summer without telling Descente. They got even worse when Descente signed a deal which would effectively end in a merger with Wacoal without telling Itochu. So it should have been less of a surprise than it appeared when Itochu announced this past Thursday it would launch a Partial Tender Offer for 9.56% of the shares outstanding of Descente.
Itochu’s Partial Tender is interesting, and there is a trade here if enough people are sceptical of Descente’s ability to play hardball. It is, however, not particularly cheap, and the shares were below ¥2,000/share last Wednesday for a reason.
Because Itochu is putting itself in a place to not be able to win (i.e. not control the board post-tender, also knowing that Descente could dilute them at will), this is an invitation by Itochu to minority shareholders to make their opinions known, for the media and commentators to do so too, and for someone else to come in over the top.
Travis Lundy thinks this goes to close to ¥2800 – and did close at ¥2,771 on Friday – because of expectations that Descente will find a white knight to pay more or that the family could launch an MBO. Anybody who wants Descente doesn’t want it for its Japan business. So paying a higher price than someone who wants to expand aggressively in China to allow entrenched management to not expand aggressively in China requires deeper pockets or a lot more patience.
Healthscope has announced it has entered into an Implementation Deed with Brookfield, under which Brookfield seeks to acquire 100% of Healthscope by way of a scheme at A$2.50/share, and a simultaneous Off-market takeover Offer at $2.40/share, both inclusive of an interim dividend of $.035/share. The considerations under these proposals compare to the earlier indicative considerations of $2.585/share and $2.455/share respectively under the unsolicited conditional proposals announced back in November.
HSO also announced that the BGH-led consortium, which holds a ~20% stake, said it could improve the terms of its previous offer of $2.36/share, provided it was given access to Healthscope’s data room.
The 3.3% and 2.2% step down in Consideration under the Scheme and Off-market Offer compared to the earlier proposals underscores the uneasy backdrop to this Offer on account of various operational issues faced by Healthscope. It also underlines the fact that even provided due diligence, there can be no guarantee the BGH-led consortium will bump its initial bid.
Shares are trading at a punchy $2.45/share, facing either the Scheme proposal or the possibility the BGH ups its offer, with or without due diligence. This is a mid-single-digits annualized return which assumes that either BGH will up, or will take the Scheme rather than see whether the Off-Market Takeover gets done. This is okay, but not great. I’d look to enter closer to the Off-market consideration level.
On 26 October Hitachi Ltd (6501 JP)and Faurecia (EO FP)announced that Faurecia would take over Hitachi car audio and infotainment equipment subsidiary in Clarion a tender offer to be launched 3+ months hence. Clarion has now announced a forecast revision for the fiscal year to 31 March 2019 which involves a shortfall in revenue of 9.1%, a 16.7% drop in forecast Operating Profit, and a drop in Net Profit from ¥1.7bn to a loss of ¥500mn (a ¥2.2bn swing); fortunately Faurecia also announced it will go through with the deal with no changes (other than to extend the Tender Offer to 21 business days).
This deal is quite straightforward. The deal is on schedule and coming through as planned.
Travis expects this deal will end up with Faurecia owning over 90% and there will be a Demand For Shares as allowed to Special Controlling Shareholders (under Article 179, Paragraph 1 of the Companies Act) allowing them to force out minorities, potentially by the 3rd week of March 2019.
At the current close of ¥2,496, it is offering <2% annualized return for slightly more than one-month of cash usage, and negligible risk this deal doesn’t go through. Tight, but to be expected.
Thirty minutes after Eclipx guided down its FY19 NPATA figure, Mcmillan Shakespeare (MMS AU)announced that the first court meeting to be held on the 1st February – which would consider the Scheme documents that are sent to ECX shareholders – will be rescheduled. No new date was announced.
Taken purely on the guidance downgrade and the MAC’s described in the SIA, on balance, this deal still looks good to go. I don’t see a MAC being triggered here.
But this new development could/should also be viewed in conjunction with the large step down in NPATA guidance for FY18 (announced on the 6 August 2018, and resulted in the large decline as seen in the chart below), where FY18 NPATA was guidance was reduced to A$77-$80mn (13-17% growth ) versus prior guidance of 27-30% growth. Perhaps MMS want ECX to come out and say their forecast for annual NPATA is down 10%.
Still, at a 15% gross spread to terms and trading ~5% above its undisturbed price, prior to Sg Fleet (SGF AU)‘s August proposal – while ECX’s peer group is down 17% on average since SGF’s tilt – the negative news surrounding the NPATA guidance and the MACs appears fully priced in.
The deal is done. Shareholders approved the deal. Given where book value and market prices were on the day before the revised plan was announced on 7 December, Travis expects a spirited appraisal rights process.
For those who are now looking at this as an arb situation, the return is quite decent if you buy on the bid and can get multiples of leverage and keep them after the shares have been delisted, while waiting for payment. If you can get multiples of leverage only while the shares are listed, it is still pretty OK. If you are an arb with no leverage, this is still OK for a Japanese deal.
SCSK announced a Tender Offer to buy out minorities in Veriserve, in which it holds 55.59% of voting rights. The Tender Offer is at ¥6,700/share which is a 43.6% premium to the last traded price. The price does not seem egregiously unfair, but for investors who own it who think it has another double in it this year they might get upset. And the lack of good process here deserves attention.
The lack of imagining a competing bid is not good governance. The lack of looking for one is not either. The lack of true fairness opinion is also not good governance.
Still, it is at a 14+year high. It is a small cap. Not that many people will care. It is not cheap on a PER basis and not really inexpensive on an EV/EBITDA basis.
There IS a chance, theoretically, that this does not go through. SCSK doesn’t have a super-majority, and if it does not get 11.1% of the shares outstanding, it will not be able to automatically squeeze out minorities. But Travis does not think it will be particularly difficult to get there.
Sumitomo Corp (8053 JP) consolidated subsidiary SCSK Corp (9719 JP) announced a Tender Offer to buy out minorities in JIEC at ¥2,750/share, in which it has 69.52% of voting rights. This deal is a worthwhile example of some of the weaknesses in the execution of the current Corporate Governance Code and the “fairness” of M&A in Japan.
The lack of a competing bid and true fairness opinion are not good governance. The fact that the bid is 1.4% above the bottom of the Target’s own Advisor’s fair value DCF valuation range while the top of the range is 61.3% higher is disappointing.
But what are you gonna do? SCSK has a super-majority. The stock is super-duper illiquid. The Offer is a 31% premium to the highest price ever paid for the stock. There is no minimum to the tender so it will be “successful” if no one tenders.
So you suck it up and buy and tender, or tender what you own. And then you write a public comment to the METI Fair M&A process.
Mastercard Inc Class A (MA US) has made a £233mn Offer (£0.33/share) to take over cross-border payments firm Earthport, trumpingVisa Inc Class A Shares (V US)‘s offer late December by 10%. The Offer is conditional on 75% of EPO’s shareholders accepting with 13.08% of shares outstanding in the bag. EPO’s shares increased to £0.282 following Visa’s offer, but currently trade at £0.37.50, ~14% above the latest offer, suggesting a higher bid is likely, or at least expected.
For EPO shareholders, who watched their shares erase 70% of their value over the last 2 years and trade around £0.05 earlier this month, this is a fantastic result. Mastercard’s bid also comes at a 65% premium to the placement at £0.20/share on 4 October 2017.
A (significantly) higher offer price is plausible. EPO can be seen as a disruptor to these card giants. Instantaneous bank-to-bank transfers and the increase in mobile payments are a threat to their traditional business models as they eliminate payment cards from the transaction loop. Both Visa and Mastercard have deep pockets and EPO would help both Visa and Mastercard expand their product offering.
There is no clear or discernible pricing methodology to exact where a bidding war will send the share price. But it could get (unsurprisingly) crazier from here. I think a £0.40/share offer is not unreasonable or out of the question, and is a level where shares often found support for a year and half back in 2014 and 2015.
CMA CGM SA (144898Z FP)has published its prospectus for what is evidently a heavily orchestrated Public Tender Offer for CEVA. Ceva’s Board has concluded that offer is fair & reasonable but does not recommend shareholders tender. CMA CGM added that “the recommendation to shareholders from the CEVA board not to tender shares in exchange for cash is done in perfect agreement with CMA CGM“.
CMA CGM currently holds 50.6% of CEVA, via a 33% direct stake with the remainder in derivatives. After a 10-trading day cooling off period, the offer will be open for acceptances between February 12 to March 12, unless extended. It is the intention of CMA CGM to maintain CEVA’s listing.
For the month of January, seventeen new deals were discussed on Smartkarma with an overall deal size of US$91bn. This number does not include rumours on Nexon Gt Co Ltd (041140 KS) and Capitaland Ltd (CAPL SP)‘s acquisition of Ascendas-Singbridge. The average transaction premium was 43%, or 26% if ignoring Earthport plc (EPO LN)‘s offer. This insight provides a summary of ongoing M&A situations and a recap of news associated with each event situation in January.
HOC initially targeted an IPO in 2018 with an expected market cap and an enterprise value of ~₩8tn and ₩10tn respectively, as discussed by Sanghyun in an earlier insight (Hyundai Oilbank IPO Update: Timeline & Valuation). The IPO was postponed after the regulator picked over the balance sheet; and probably just as well, as falling refining margins resulted in HOC’s operating profit declining 42% to ₩661bn last year. The sale to Aramco is expected to push the IPO back to later this year.
Prior to Aramco’s involvement, HHI was (and effectively is) a weakish stub with the 31% stake in HHIC accounting for just 32%/26% of NAV/GAV; the unlisted operations and the future earnings of those investments were more critical to understanding HHI’s valuation. This investment by Aramco quantifies the valuation for the majority (~95%) of HHI’s unlisted investments, reinforcing the already somewhat prevalent view that HHI’s discount to NAV was excessively wide.
But HHI/HHIC weren’t done yet. Just when the NAV was expected to narrow further – especially as additional newsflow filters in on the outcome of the board meetings, the expected timeline to completion, and the possibility of HOC’s IPO later this year – HHIC announced a split-off, a PIK and rights issue. Please refer to this development in the “Events” section above.
The U.S. Treasury (OFAC) has lifted sanctions imposed on En+ Group plc, UC Rusal plc, and JSC EuroSibEnergo. The key to lifting these sanctions was Oleg Deripaska reducing his direct and indirect shareholding stake in these companies and severing his control. All sanctions on Deripaska continue in force.
Rusal announced that En+ had entered into a securities exchange agreement with Glencore, pursuant to which Glencore shall transfer 8.75% of Rusal’s shares to En+ in consideration for En+ issuing new GDRs to Glencore representing approximately 10.55% of the enlarged share capital of En+.
The transfer will be done in two stages: 2% to be transferred following the removal of Rusal and EN+ from the SDN list; and 6.75% 12 months later. This two-stage process appears geared to circumvent a mandatory takeover by En+. Hong Kong employs a “creeper” speed limit, where shareholders (holding between 30-50%) can creep their shareholding upwards by 2% in a 12-month period (Rule 26.1 (c)).
As an aside, after sanctions were lifted, En+ announced seven new directors, including Christopher Bancroft Burnham, who served as Under Secretary-General for Management of the United Nations (alongside John Bolton, Trump’s current national security adviser). Burnham was also on Trump’s Presidential Transition Team
Rusal’s NAV discount has narrowed to 68.5% from 71% the previous Friday. This compares to the 45-50% discount range prior to the sanctions being imposed. This should narrow further.
I issued a month-end share class summary, a companion insight to Travis’ H/A Spread & Southbound Monitors and Ke Yan‘s HK Connect Discovery Weeklies. This share class monitor provides a snapshot of the premium/discounts for 215 share classifications (ADRs, Koran prefs, Dual-class, Thai foreign/local Thai) around the region.
The average premium/discount for each set over a one-year period is graphed below.
By Travis’ calcs, there was something on the order of ¥630-650bn of shares of several names to buy on the close this past Wednesday. There was also, therefore, something like ¥630-650bn of TOPIX and JPX Nikkei 400 (almost all TOPIX) to sell on the close of Wednesday.
Softbank Corp (9434 JP) was expected to see total buying of ¥340bn or so; and Takeda Pharmaceutical (4502 JP)buying of ¥260-280bn at the close. (Both names did trade a very large amount off-market.) A number of other names see TOPIX inclusions because of them listing on TSE1 in December or because of share count increasing because of merger (like LIFULL (2120 JP)) or because of offerings.
A VERY significant amount of both names were purchased in “guaranteed close” trades where indexers actually paid close-plus pricing until the very end of the day because of fears that the actual market might not close. This meant that on-market volume for Takeda and Softbank was a fraction of what might be expected. The risk was transferred but to get in the flow you had to trade off-market.
The Centuria Capital (CNI AU) resolution has passed. This resolution was not a vote to decide on tendering the shares held by CNI in Propertylink Group (PLG AU) into ESR’s offer; but to give CNI’s board the authorisation to tender (or not to tender) those PLG shares.
Minebea Co Ltd (6479 JP)announced that it had received all relevant anti-trust approvals but would not start the Tender Offer for U Shin Ltd (6985 JP) until the start of February (the original announcement had said the Tender would commence at the end of January).
The interesting path of the Mobius strip of connections that is the HCN continues: China Goldjoy (1282 HK)‘s chairman Yao Jianhui (& others) have pledged 12.14% of China Goldjoy to Huarong Investments (2277HK). Goldjoy is the Offeror for New Sports Group (299 HK).
CCASS
My ongoing series flags large moves (~10%) in CCASS holdings over the past week or so, moves which are often outside normal market transactions. These may be indicative of share pledges. Or potential takeovers. Or simply help understand volume swings.
Often these moves can easily be explained – the placement of new shares, rights issue, movements subsequent to a takeover, amongst others. For those mentioned below, I could not find an obvious reason for the CCASS move.
Netmarble Games (251270 KS) officially announced on January 31st that it is interested in buying Nexon/NXC Corp. We believe that there is a growing likelihood of a potential consortium which includes Tencent and Netmarble Games to acquire NXC Corp/Nexon. Three major reasons why Tencent may want to partner with Netmarble Games to acquire NXC Corp/Nexon include the following:
Avoid the cultural backlash from Korean gamers
Among all the companies that Tencent has invested in Korea, Netmarble Games has become the biggest in amount.
Netmarble Games is more focused on games and has a stronger balance sheet than Kakao Corp, which has also shown interest in acquiring NXC Corp/Nexon.
Healthscope Ltd (HSO AU) has announced it has entered into an Implementation Deed with Brookfield, under which Brookfield seeks to acquire 100% of Healthscope by way of a scheme at A$2.50/share, and a simultaneous Off-market takeover Offer at $2.40/share.
The considerations under these proposals compares to the earlier indicative considerations of $2.585/share and $2.455/share respectively under the unsolicited conditional proposals announced back in November.
The $2.50/share under the scheme – which is priced at a 40% premium to the undisturbed price – includes an interim dividend of $.035/share. The scheme consideration represents an EV/EBITDA (Dec-18 end) of ~14.7x.
Both proposals are subject to limited conditions and neither are subject to due diligence and financing. The Off-market is subject to a 50.1% acceptance condition and the Scheme not being successful.
Brookfield’s proposals have unanimous HSO Board backing.
The Off-market takeover will remain open for at least four weeks after the date of the Scheme meeting, providing shareholders with opportunity to consider the Offer, depending on the outcome of the Scheme vote.
HSO also announced that the BGH-led consortium, which holds a ~20% stake, said it could improve the terms of its previous offer of $2.36/share, provided it was given access to Healthscope’s data room.
An explanatory booklet for Brookfield’s proposals is expected to be dispatched in April/May and the Scheme meeting to take place in May/June.
Currently trading tight to the Scheme consideration at $2.45/share.
Below is a comprehensive summary of the Hyundai Heavy/DSME event that engulfed the Korean market yesterday. This is a multi step process. Details of most events will be determined after one month of holdback period.
I will provide a trade approach on each name in a follow-up post.
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SCSK currently holds 2,900,000 shares or 55.59% of voting rights.
The Tender Offer is at ¥6,700/share which is a 43.6% premium to the last traded price of the day before the announcement (¥4,665), a 44.6% premium to the one-month average, a 28.3% premium to the 3-month average, and a 36.6% premium to the 6-month average.
The price does not seem egregiously unfair, but for investors who own it who think it has another double in it this year they might get upset.
This is one of those situations with which the currently underway METI M&A Fairness enquiry might have a problem.
And if you care about the fairness of the M&A bidding and response process, and ensuring that minority investors get their interests defended by process, have a look at the METI Fair M&A panel and its consultation paper and by all means offer your comments.
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Netmarble Games (251270 KS) officially announced on January 31st that it is interested in buying Nexon/NXC Corp. We believe that there is a growing likelihood of a potential consortium which includes Tencent and Netmarble Games to acquire NXC Corp/Nexon. Three major reasons why Tencent may want to partner with Netmarble Games to acquire NXC Corp/Nexon include the following:
Avoid the cultural backlash from Korean gamers
Among all the companies that Tencent has invested in Korea, Netmarble Games has become the biggest in amount.
Netmarble Games is more focused on games and has a stronger balance sheet than Kakao Corp, which has also shown interest in acquiring NXC Corp/Nexon.
Healthscope Ltd (HSO AU) has announced it has entered into an Implementation Deed with Brookfield, under which Brookfield seeks to acquire 100% of Healthscope by way of a scheme at A$2.50/share, and a simultaneous Off-market takeover Offer at $2.40/share.
The considerations under these proposals compares to the earlier indicative considerations of $2.585/share and $2.455/share respectively under the unsolicited conditional proposals announced back in November.
The $2.50/share under the scheme – which is priced at a 40% premium to the undisturbed price – includes an interim dividend of $.035/share. The scheme consideration represents an EV/EBITDA (Dec-18 end) of ~14.7x.
Both proposals are subject to limited conditions and neither are subject to due diligence and financing. The Off-market is subject to a 50.1% acceptance condition and the Scheme not being successful.
Brookfield’s proposals have unanimous HSO Board backing.
The Off-market takeover will remain open for at least four weeks after the date of the Scheme meeting, providing shareholders with opportunity to consider the Offer, depending on the outcome of the Scheme vote.
HSO also announced that the BGH-led consortium, which holds a ~20% stake, said it could improve the terms of its previous offer of $2.36/share, provided it was given access to Healthscope’s data room.
An explanatory booklet for Brookfield’s proposals is expected to be dispatched in April/May and the Scheme meeting to take place in May/June.
Currently trading tight to the Scheme consideration at $2.45/share.
Below is a comprehensive summary of the Hyundai Heavy/DSME event that engulfed the Korean market yesterday. This is a multi step process. Details of most events will be determined after one month of holdback period.
I will provide a trade approach on each name in a follow-up post.
SCSK currently holds 2,900,000 shares or 55.59% of voting rights.
The Tender Offer is at ¥6,700/share which is a 43.6% premium to the last traded price of the day before the announcement (¥4,665), a 44.6% premium to the one-month average, a 28.3% premium to the 3-month average, and a 36.6% premium to the 6-month average.
The price does not seem egregiously unfair, but for investors who own it who think it has another double in it this year they might get upset.
This is one of those situations with which the currently underway METI M&A Fairness enquiry might have a problem.
And if you care about the fairness of the M&A bidding and response process, and ensuring that minority investors get their interests defended by process, have a look at the METI Fair M&A panel and its consultation paper and by all means offer your comments.
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This share class monitor provides a snapshot of the premium/discounts for various share classifications around the region, and comprises four sets of data:
The average premium/discount for each set over a one-year period is graphed below.
Source: CapIQ
For a granular breakdown of each data set, PDFs are attached at the bottom of this insight.
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Healthscope Ltd (HSO AU) has announced it has entered into an Implementation Deed with Brookfield, under which Brookfield seeks to acquire 100% of Healthscope by way of a scheme at A$2.50/share, and a simultaneous Off-market takeover Offer at $2.40/share.
The considerations under these proposals compares to the earlier indicative considerations of $2.585/share and $2.455/share respectively under the unsolicited conditional proposals announced back in November.
The $2.50/share under the scheme – which is priced at a 40% premium to the undisturbed price – includes an interim dividend of $.035/share. The scheme consideration represents an EV/EBITDA (Dec-18 end) of ~14.7x.
Both proposals are subject to limited conditions and neither are subject to due diligence and financing. The Off-market is subject to a 50.1% acceptance condition and the Scheme not being successful.
Brookfield’s proposals have unanimous HSO Board backing.
The Off-market takeover will remain open for at least four weeks after the date of the Scheme meeting, providing shareholders with opportunity to consider the Offer, depending on the outcome of the Scheme vote.
HSO also announced that the BGH-led consortium, which holds a ~20% stake, said it could improve the terms of its previous offer of $2.36/share, provided it was given access to Healthscope’s data room.
An explanatory booklet for Brookfield’s proposals is expected to be dispatched in April/May and the Scheme meeting to take place in May/June.
Currently trading tight to the Scheme consideration at $2.45/share.
Below is a comprehensive summary of the Hyundai Heavy/DSME event that engulfed the Korean market yesterday. This is a multi step process. Details of most events will be determined after one month of holdback period.
I will provide a trade approach on each name in a follow-up post.
SCSK currently holds 2,900,000 shares or 55.59% of voting rights.
The Tender Offer is at ¥6,700/share which is a 43.6% premium to the last traded price of the day before the announcement (¥4,665), a 44.6% premium to the one-month average, a 28.3% premium to the 3-month average, and a 36.6% premium to the 6-month average.
The price does not seem egregiously unfair, but for investors who own it who think it has another double in it this year they might get upset.
This is one of those situations with which the currently underway METI M&A Fairness enquiry might have a problem.
And if you care about the fairness of the M&A bidding and response process, and ensuring that minority investors get their interests defended by process, have a look at the METI Fair M&A panel and its consultation paper and by all means offer your comments.
SCSK currently holds 4,768,000 shares or 69.52% of voting rights.
The Tender Offer is at ¥2,750/share which is a 39.3% premium to the last traded price of the day before the announcement (¥1,974), a 38% premium to the one-month average, and a 41% premium to the 3-month and 6-month averages.
It is being done at about 7.5x TTM EV/EBITDA.
This is one of those situations with which the currently underway METI M&A Fairness enquiry might have a problem.
TOPPAN PRINTING (7911 JP) is Japan’s current Negative Enterprise Value ‘champion’. Although only growing in the low single digits and with margins to match, comprehensive income margins and returns are significantly higher, as they take Toppan’s significant investment portfolio gains into account. The investment portfolio has grown at a 39.1% compound annual growth rate (CAGR) over the last five years, outperforming Toppan’s core operations (6.4% CAGR) and the overall stock market (7.5% CAGR).
Source: Japan Analytics
MARKET MYOPIA – Despite the investment portfolio’s ¥411b contribution to Shareholder’s Equity, which has otherwise only increased by ¥98b, the stock market preferred to focus on the stagnating top-line, and the shares have been serial underperformers. Toppan’s market capitalisation has grown by only 2% per annum or just ¥34b since December 2013. From the recent peak in June 2017, Toppan shares have underperformed the market by 27% and, for the last year, have been at their most extreme value relative to TOPIX over the previous thirty years. During this period, Toppan’s equity holdings rose from 43% of the company’s market capitalisation to close to parity at the recent market peak in September 2018.
Source: Japan Analytics
BOTTOMING OUT – With the upcoming boost to sales in the printing business from the change in Japan’s gengō (元号) or era name on the accession of the new Emperor in April, the shares have finally broken out of a one-year period in the Oversold ‘doldrums’.
Source: Toppan Printing Investor Presentation November 12th 2018
SELLING STRATEGIC INVESTMENTS – More importantly, the company has become more proactive in managing equity risk. On 23rd January, Toppan sold 10.5m shares in Recruit Holdings (6098 JP) for approximately ¥31.5b, reducing Toppan’s holding in Japan’s leading listing employment services business from 6.57% to 6.05%. Despite the boilerplate language used to describe the company’s strategy towards strategic shareholdings, Toppan has begun to address the portfolio more proactively and in accordance with the spirit of the new guidelines on Corporate Governance in Japan.
Source: Japan Analytics
BUYBACK POTENTIAL – With this sale, Toppan’s liquid assets will now exceed US$3b or 58% of the current market capitalisation, while the company has committed to capital expenditures totalling only ¥125b over the next five years. Toppan last conducted a modest 0.2% share buyback in 2015-Q2, which was ‘unwound’ by a 0.5% reduction in Treasury Stock in 2017-Q3, which was not accompanied by a share cancellation. With just 8% of shares outstanding held in treasury, there is ample room for further buybacks.
Source: Japan Analytics
For Japan’s ‘Deep Value’ investors or even the ‘activists’, Toppan is an attractive opportunity.
In the DETAIL below, we list the ‘top’ twenty-five negative enterprise value companies in Japan and provide a brief overview of Toppan’s business, the investment portfolio and explain why, with apologies to our ‘Brothers in Arms’, Dire Straits, investors in Toppan are, at present, getting their ‘money for nothin’ and clicks for free’.
Dire Straits: Brothers in Arms/Money for Nothing – Knopfler/Sting – 1985
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It was reported yesterday after market close that Hyundai Heavy Industries (009540 KS) (HHI) may be interesting in buying Daewoo Shipbuilding & Marine Engineering (042660 KS) (DSME). Hyundai Heavy Industries has mentioned that it is reviewing this potential merger but that nothing has been determined so far. Korea Development Bank (KDB) currently owns a 55.7% stake in DSME, which is currently worth 2.3 trillion won as of January 31st. The local media have mentioned there there could be some formal announcement of the deal on March 31st at the HHI’s board meeting.
We have provided the five major scenarios of the potential deal structure between DSME & HHIH. While we do not rule out a potential rights offering of the common shares, we think that a greater probability is that HHIH may use a combination its treasury shares, cash, and new issue of dividend preferred stock (Scenario V) to complete this purchase of the 55.7% stake of DSME.
What trade has the best risk/reward? At this point, it would appear that the best trade would be to go long on Samsung Heavy Industries (010140 KS).
Ceva’s Board has concluded that “the offer price of CHF 30 per CEVA share is reasonable from a financial perspective and that the Offer provides a fair exit opportunity for shareholders who wish to receive cash for their CEVA shares”.
However, CEVA Board does not recommend that shareholders tender shares in the belief that shareholders could realise a higher value with their continuing investment, due to:
the growth potential inherent in the CEVA business.
the effects of the acquisition of the freight management business of CMA CGM.
the strategic partnership between CEVA and CMA CGM.
According to Ceva, “the valuation of the revised business plan indicates a midpoint value of 40 francs per share, well above the share price of 30 francs offered“.
CMA CGM added that “the recommendation to shareholders from the CEVA board not to tender shares in exchange for cash is done in perfect agreement with CMA CGM“.
CMA CGM currently holds 50.6% of CEVA, via a 33% direct stake with the remainder in derivatives. It is the intention of CMA CGM to maintain CEVA’s listing.
After a 10-trading day cooling off period, the offer will be open for acceptances between February 12 to March 12, unless extended.
Shares are currently trading (marginally) through terms.
EPO’s board has recommended Mastercard’s Offer to its shareholders. Visa’s Scheme meeting, initially scheduled for the 21 February, has been adjourned.
Mastercard’s £0.33/share offer compares to Visa’s £0.30/share tilt, and represents a 340% premium over EPO’s undisturbed price of £0.075/share.
The Offer is conditional on 75% of EPO’s shareholders accepting with 13.08% of shares outstanding in the bag. Mastercard will move to cancel the shares on AIM if it achieves 75%.
EPO’s shares increased to £0.282 following Visa’s offer, but currently trades at ~£0.37, 12% above the latest offer, suggesting a higher bid is likely, or at least expected.
Cross-border payments are an estimated US$30tn business and both credit card giants are registering higher annual growth and billions of dollars in fees. EPO is a drop in the ocean for Mastercard (US$205bn market cap) and Visa (US$297bn).
Arguably this deal could run significantly higher – the question is how desperate these two players are towards buying now as opposed to building.
And it’s not just small transactions in the payment industry getting attention, after Fiserv Inc (FISV US)‘s announcement earlier this month it would merge with First Data Corp (FDC US)in a US$22bn transaction, and Paypal Holdings (PYPL US)‘s US$2.2bn acquisition of Sweden’s iZettle last year.
Common was up 4.81% yesterday. 1P went up 2.45%. The duo is now at 232% of σ. Pref discount stands at 40.32%. This is above 120D mean. This much premium on Common is the highest since October. On 120D, price ratio is above 120D mean.
Current PER on FY19 earnings is 27x. Valuation wise, there doesn’t seem to be much room for further upside. Local sentiments on the fundamentals outlook are relatively divided. This suggests that it’d be hard to build sustainable price momentums.
I’d trade this duo on the current divergence. Just, we are moving towards March shareholder meeting cycle. Div yield difference on Common/1P is also pretty minimal. I’d have this trade with a very short-term horizon.
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United Co Rusal (486 HK)‘s discount to NAV narrows after sanctions are lifted, but remains well off its pre-sanctions level.
Preceding my comments on HHI and Rusal are the weekly setup/unwind tables for Asia-Pacific Holdcos.
These relationships trade with a minimum liquidity threshold of US$1mn on a 90-day moving average, and a % market capitalisation threshold – the $ value of the holding/opco held, over the parent’s market capitalisation, expressed as a % – of at least 20%.
On Tuesday, TPG Telecom Ltd (TPM AU) surprisingly cancelled plans to roll out its mobile network in Australia, blaming the government’s ban on using Huawei Technology (40978Z CH) for 5G equipment for its decision. The market seems to be undecided if TPG’s decision will lead to Australian Competition and Consumer Commission (ACCC) approving the TPG/VHA merger as TPG shares rose 3%, but Hutchison Telecomm (Aust) (HTA AU) (50% owner of VHA) shares declined 4%.
The bull view is that TPG’s decision removes ACCC’s primary concern and paves the way for approval. The bear view is that TPG’s eggs are all in the merger basket and the ACCC could call TPG’s bluff and block the merger. Overall, TPG’s decision to cancel its network rollout plans does not change our view that the risk-reward remain skewed towards the downside.
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Local institutions are busy scooping up Hyosung Corporation (004800 KS) shares lately. The owner risk is now gone. There are increasing signs of improving fundamentals on all of the four major subs. Some are already expecting ₩5,000 per share. This is a 9.2% annual div yield at the last closing price.
Discount is also attractive. It is now at 46% to NAV. With this much div yield, discount should be much below the local peer average of 40%.
I’d continue to long Holdco. Hedge would be tricky. Heavy is up 15% YTD. I admit that there is no clear cointegrated relationship between them. But Heavy’s recent rally is more of a speculative money pushing up on the hydrogen vehicle theme. I’d pick Heavy for a hedge.
After 6.5bn+ shares came off lockup last week (by Travis Lundy’s estimate), Xiaomi made a placement equal to about 1% of shares outstanding at a sharp discount to the close. This follows a block of 120mm shares last Thursday at HK$8.80 (at a 13+% discount); Apoletto reported a distribution (sale) of 594+mm shares on January 9th to reduce their total position across all funds from 9.25% to 4.99%; and there was a block placement launched earlier in the week for 231mm shares for sale between HK$9.28 and HK$9.60.
While as much as 1bn shares may have already transacted (assuming most of the 594mm shares distributed by Apoletto have been sold in the market), there were ~6.5 billion shares which could be sold and an additional 1bn+ of additional conversions designed to be sold.
In another 6 months, there will be another 4bn+ shares which come off LockUp. In total, that is up to 10-11bn shares coming off lockup between a week ago and 6 months from now. That is four times the total IPO size, and 70-80% of the total position coming off lock-up has an average in-price of HK$2.00 or less. Apoletto’s average in-price was HK$9.72.
Travis is also skeptical that the company’s capital deserves a premium to peers, and is not entirely convinced that the pre-IPO profit forecasts are going to be met in the medium-term. In the meantime, a lot of the current capital structure base is looking to get out.
Nota Bene: Bloomberg’s 3bn-shares-to-come-off-lockup number was confirmed by Travis (the day he published the piece linked below) with the people who tallied the info for the CACS function. They had neglected to count a certain group of shareholders. The actual number will be well north of 6 billion shares.
After the close of trading on the 15 January, NTT announced it had repurchased 3.395mm shares for ¥15.349bn in the first 7 trading days of the month, purchasing 10.9% of the volume traded. This announcement was bang in line with Travis’ insight the prior day, where he anticipated the buybacks would soon be done.
The push to buy shares on-market at NTT vs off-market at NTT Docomo has had some effect but not a huge effect. The NTT/Docomo price ratio is a bit more than 5% off its late October 2018 lows prior to the “Docomo Shock”, but the ratio is off highs. Off the lows, the Stub Trade has done really well.
NTT DoCoMo bought back ¥600bn of shares from NTT at the end of 2018. That means NTT DoCoMo could buy back perhaps ¥300-400bn of shares from the market over the next year or so before ‘feeling the need’ to buy back shares from NTT again. NTT will likely buy back at least ¥160bn of NTT shares from the government in FY19 starting April 1st, which means there will be room to buy back another ¥100bn from the government before not having any more room to do so.
There could be an NTT buyback from the market in FY2019, and one should expect that for the company to buy back shares from the government again, if NTT follows the pattern shown to date, there should be another ¥400-500bn of buybacks from the market over the next two years, and if EPS threatens a further fall on NTT DoCoMo earnings weakness, NTT might boost the buyback to make up for that.
The very large sale by NTT of NTT Docomo shares this past December will free up a significant amount of Distributable Capital Surplus.
On a three-year basis, Travis would rather own NTT than NTT Docomo. But he expects the drift on the ratio will not be overwhelming unless NTT does “something significant”.
Singaporean real-estate group Capitaland has entered into a SPA to buy Ascendas-Singbridge (ASB) from its controlling shareholder, Temasek. The proposed acquisition values ASB at an enterprise value of S$10.9bn and equity value of S$6.0bn. Capitaland will fund the acquisition through 50% cash and 50% in shares (862.3mn shares @$3.25/share – ~17% dilution). Capitaland-ASB will have a pro-forma AUM of S$116bn, making it the largest real estate investment manager in Asia and the ninth largest global real estate manager.
Hitachi Ltd (6501 JP)announced it had received approvals from the relevant government authorities, and its Tender Offer for Yungtay (at TWD 60/share) has now launched. The Tender Offer will go through March 7th 2019 with the target of reaching 100% ownership. Son of the founder, former CEO, and Honorary Chairman Hsu Tso-Li (Chou-Li) of Yungtay has agreed to tender his 4.27% holding. The main difference between the offer details as discussed in Going Up! Hitachi Tender for Yungtay Engineering (1507 TT) back in October, is a minimum threshold for success of reaching just over one-third of the shares outstanding, with a minimum to buy of 88,504,328 shares (21.66%, including the 4.27% to be tendered by Hsu Tso-Li).
This deal looks pretty straightforward, but the stock has been trading reasonably tight to terms, with annualized spreads on a reasonable expectation of closing date in the 3.5-4.5% annualized range for a decent part of December, rising into early January before seeing a jump in price and drop in annualized on the second trading day of the year. This shows some expectation of a fight and a bump.
To avoid that fight and bump – the Baojia Group, which supported Hsu Tso-Ming’s board revolt last summer (discussed in the previous insight), has reportedly accumulated a 10% stake – Hitachi has lowered its minimum threshold to complete the deal to get to one-third plus a share. Given that it controls 11.7% itself as the largest shareholder, and has another 4.3% from the chairman in the bag, that means it needs about 17.3% of the remaining 84% to be successful.
Because the minimum is only about 21% of the float, this deal has quite decent odds of getting up unless someone makes a more serious run for it. As an arb, Travis sees a small chance of a bump because of some potential harassment value by Hsu Tso-Ming’s friends at Baojia Group. Hitachi has already taken that into account with the lowering of the minimum, but it is possible that enough noise can be created to obtain a bump.
Courts, a leading electrical, consumer electronics and furniture retailer predominantly in Singapore and Malaysia, has announced a voluntary conditional offer from Japanese big box electronics retailer Nojima Corp (7419 JP) at $0.205/share, a 34.9% premium to the last closing price. The key condition to the Offer is the valid acceptances of 50% of shares out. Singapore Retail Group, with 73.8%, has given an irrevocable to tender. Once tendered, this offer will become unconditional. The question is whether minorities should hold on.
Barings/Topaz-controlled Singapore Retail Group are exiting, having not altered their shareholding since CAL’s 2012 listing. If Nojima receives acceptances from 90% of shareholders, it will move to compulsory delisting of the shares. If the Offer closes with Nojima holding >75% of shares, it could still launch an exit/delisting offer pursuant to Rule 1307 and Rule 1308.
Long-suffering shareholders may wish to hold on for a potential turnaround should Nojima extract expected synergies. But this looks like a decent opportunity (of sorts) to also exit along with the controlling shareholder.
The board of Navitas, a global education provider, has unanimously backed a revised bid by 18.4% shareholder BGH Consortium of A$5.825/share, 6% higher than its previous rejected offer and a 34% premium to undisturbed price.
The revised proposal drops the “lock out” conditions attached to BGH Consortium’s previous offer, enabling BGH to support a superior proposal. BGH has also been granted an exclusivity period until the 18 Feb.
Panalpina Welttransport announced that it had received an unsolicited, non-binding proposal from DSV A/S (DSV DC) to acquire the company at a price of CHF 170 per share, consisting of 1.58 DSV shares and CHF 55 in cash for each Panalpina share. The offer comes at a premium of 24% to Panalpina’s closing share price of CHF 137.5 as of 11 January 2019 and 31% to the 60-day VWAP of CHF 129.5 as of 11 January 2019. Following the announcement, Panalpina’s shares surged above the terms of the offer implying that the market was anticipating a higher bid from DSV or one of its competitors.
Investors lashed out at Panalpina’s board last year (after years of griping by some of the top holders), eventually forcing the main shareholder to support the installation of a new chairman of the board.
The stock is clearly in play. And the sector is seeing ongoing consolidation. DSV’s approach to Panalpina comes just months after it failed in an attempt to buy Switzerland’sCeva Logistics AG (CEVA SW). Media reports suggested Switzerland’s Kuehne & Nagel are also rumoured to be considering an offer for Panalpina.
Panalpina’s largest shareholder, Ernst Goehner Foundation, owns a stake of approximately 46%. If EGS wants to see OPMs up at global standards level – in the area of DSV and KNIN – then they may need to see someone else manage the assets. If EGS is steadfastly against Panalpina losing its independence, a deal will not get done. That said, if a deal does not get done because the board reflects the interest of EGS, that proves the board is not as independent as previously claimed. But one must imagine there is a right price for everything.
Earlier this month, Bristol Myers Squibb Co (BMY US)and Celgene announced a definitive agreement for BMY to acquire Celgene in a $74bn cash and stock deal. The headline price of $102.43 per Celgene share plus one CVR (contingent value right) is a 53.7% premium to CELG’s closing price of $66.64 on January 2, 2019, before assigning any value to the CVR. The CVR has a binary outcome: it will either be worth zero or will be worth a $9 cash payment upon the FDA approval of three drugs.
While there don’t appear to be any major problems in commercial products, it remains to be seen whether the antitrust authorities go further into the pipeline to determine whether potential competition from drugs still in clinical trials could present issues in the future.
Overall, the merger agreement appears fairly standard, but it does (also) require BMY shareholder approval which typically overlays a higher risk premium. For John DeMasi, the attraction for this arb is the current risk/reward.
ANTYA Investments Inc. chimes in on the deal and considers it unlikely that a suitor for CELG emerges at a higher price, whereas rumours of suitors for BMY abound, and would therefore make a long bet on BMY.
On the 10 January, PAH announced CKI had entered into a placing agreement to sell 43.8mn shares (2.05% of shares out) at HK$52.93/share (a 4.7% discount to last close), reducing CKI’s holding in PAH to 35.96%. This is CKI’s first stake sale in PAH since the 2015 restructuring of the Li Ka Shing group of companies, and it has been over three years since the CKI/PAH scheme merger was blocked by minority shareholders. It is also around two months since FIRB blocked CKI/PAH/CKA/CKHH in its scheme offer for APA Group (APA AU).
I don’t see a sale of PAH as being a realistic outcome – this is more likely an opportunity to take some money (the placement is just US$328mn) off the table. CKI remains intertwined with PAH via their utility JVs in Australia, Europe and UK, and in most investments, together they have absolute control.
I would also not discount a merger re-load. The pushback in 2015 was that the (revised) merger ratio of 1.066x (PAH/CKI) was too low and took advantage of CKI’s outperformance prior to the announcement. That ratio is now around 0.9x. A relaunched deal at ~1x would probably get up – the average since the deal-break is 1.02x and the 12-month average is 0.95x. And a merger ratio at these levels would ensure Ck Hutchison Holdings (1 HK)‘s holding into the merged entity would be <50%, so it would not be required to consolidate. This recent sell-down does not, however, elevate the near-term chances of a renewed merger.
The takeaway is that the stub is very choppy, it often (but not always) widens after the full-year results, and the highest implied stub/EBITDA occurred outside of FY16, its most profitable year. The downward trend since January last year reflects the anticipated ~17% decline in EBITDA for FY18 to ₩148bn, its lowest level in the past four years.
Sanghyun mentioned that there are signs of improving fundamentals for local cosmetics stocks (as reflected in CapIQ) and that Holdcos have traditionally been more susceptible to fundamental changes. This should augur a shift to the upside in the implied stub.
I see the discount to NAV at 27%, right on the 2STD line and compares to a 12-month average of 3%. This looks like an interesting set-up level.
The Offer for Selangor Properties (SPR MK)has been bumped again, to RM6.30 from RM6.00. The original Offer was pitched at RM5.70/share. This latest proposal is a 55% premium to the undisturbed price and 10% above the initial bid. This is starting to look reasonable, at 0.89x P/B. On balance, this will probably now get up. (link to my earlier insight: Selangor Props – Privatisation Offer Does Not Reflect Full Value)
My ongoing series flags large moves (~10%) in CCASS holdings over the past week or so, moves which are often outside normal market transactions. These may be indicative of share pledges. Or potential takeovers. Or simply help understand volume swings.
Often these moves can easily be explained – the placement of new shares, rights issue, movements subsequent to a takeover, amongst others. For those mentioned below, I could not find an obvious reason for the CCASS move.
Offer close date, (failing which) 31-Jan-2019 – Termination Date
C
Source: Company announcements. E = Smartkarma estimates; C =confirmed
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